How much tax evasion is there in the US?

As mentioned before, tax authorities are now especially eager to catch tax evaders. But how many of those are actually out there? One would suspect that there are relatively few of them in a low tax country like the United States. But again, the tax authority there has been given relatively few means to pursue investigations and audit rates are surprisingly low. And the tax code is so complicated that the line between tax evasion and confusion is rather blurred.

The Internal Revenue Service, the US federal tax authority, has estimates about how much it is missing in revenue, but as far as I know these numbers are kept well hidden, except for a study in the eighties. Academics have tried to replicate this exercise, obviously with poorer data than the IRS, but with less political pressure. The latest attempt is by Edgar Feige and Richard Cebula. They use a technique similar to one used to calculate the size of an informal economy, a technique based on the quantity of currency in circulation and of check deposits, adjusting for currency suspected abroad and financial innovation. Indeed, tax evaders try to hide income from reporting by using cash transactions. This ignores though those who use tax havens, and I welcome informed guesses on how large a factor that may be.

In any case, Feige and Cebula come to the conclusion that about 20% of reportable income is not properly reported, leading to lost revenue in the order of $400-500 billion every year. They even compute a time series that allows them to figure out what makes the non-compliance rate change. It will not surprise that it increases when national income is higher, when tax rates are higher or when nominal interest rates are higher. It is interesting to see that higher unemployment rates lead to higher non-compliance. That may have to do with more people getting informal income while on unemployment insurance. Still, I cannot shake the feeling that all these results are shaky themselves, as this data is essentially made up.